Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
It was closing hell for a terrible day in markets as investors struggle to process the dreadful and seemingly endless inflation report on Friday.
What happened today? The NASDAQ tanked -4.58% and the 10-year Treasury yield jumped 22.2 basis points. Gulp.
The 22.2 bps jump in the 10-year Treasury yield has led to Agency MBS prices pulling a Titanic and sank.
Somehow, I don’t think that Biden and Congress are going to help the middle class and low-wage workers.
Today’s opening bell is “Opening Hell!”
US Treasury 10Y yields are up +12.1 basis points as of 9:40am EST. And rising across the globe.
Equity markets? Dow is down -621.93 points and the NASDAQ is down almost -3%. But equity markets are down across the globe.
Commodities? Once again, all commodities in the red except corn (which I don’t eat) and natural gas.
Speaking of opening hell. The US Treasury 10Y-2Y yield flattened to 7 basis points.
And then we have Markit’s Credit Default Swaps index rising to the highest level since Covid (April 2020).
Markets are in a “Sea of Red.”
Off to bad start this week. The 10-year Treasury yield rose 11 basis points at 8am EST while the S&P 500 E-mini futures are down -2.5%.
And then we have this scary chart of mortgage rates. Bankrate’s 30-year mortgage rate is now up to 5.78%.
And then we have Bitcoin. Bitcoin is struggling as The Fed tightens the noose on the US economy with expected Fed rate hikes and a rising US Dollar.
I’ve got a whole lotta anxiety over this week.
The dynamic duo.
The Federal Reserve is making up for Bernanke and Yellen’s “too slow to remove” Fed stimulus policies (QE1 – QE3) and Powell’s Covid-related QE4. Now The Fed is trying to remove the stimulus in a (misguided) attempt to cool inflation. Remember, the dramatic rise in prices was caused by more than Fed stimulypto, it was also caused by Biden’s executive orders driving up oil, gasoline and natural gas prices and the massive Federal spending bills signed by Biden.
The result of The Fed’s jawboning about undoing Fed stimulypto is take away the punch bowl. But the results are troubling. Both the total return indices for US Treasuries and Agency Mortgage-backed Securities (MBS) have declined dramatically since inflation has been rising (highest in 40 years) and The Fed is expected to crank their target rate by February 2023 to 3.448% (The Fed Funds Target Rate currently stands at 1%). That is almost a 250 basis point rise in the target rate in 8 months.
While the 10-year rate is rising rapidly, the 2-year Treasury yield is REALLY rising fast.
And the yield curve (10Y-2Y) is down to +8.819 basis points as The Fed signals tightening.
And with rising 10 and 2Y Treasury yields, we are seeing the fastest rise in mortgage rates since 1981.
The CPI news on Friday was so awful that it changed the bond market’s view of Fed trajectory, and the weakest sector broke. In bond jargon, MBS went “no-bid.” No buyers for MBS. Then a few posted prices beyond borrower demand, not wanting to buy except at penalty prices. (Courtesy of Cherry Creek Mortgage)
Despite what Treasury Secretary Janet Yellen has said, Friday’s inflation report demonstrated that inflation is no longer transitory. And with that realization, there was a dearth of bidders for Agency Mortgage-backed Securities (Agency MBS) on Friday.
As a result, agency MBS 2.5% dropped to under $90 as markets expect The Fed to keep raising rates to combat inflation.
Duration of the FNCL 2.5% agency MBS has been extending with growing inflation. Duration was under 1 on August 2, 2021 but is now 7 times greater at almost 7.
Note to Yellen: inflation seems be permanent, not transitory. Or at least inflation will remain high for the foreseeable future, crushing the life out of Agency MBS.
Up, up and away in our inflationary balloon!
Regular gasoline prices have breached the $5 a gallon barrier, the highest in recorded history. And it is even worse in states like California where regular gas prices have been above $7 per gallon.
Bankrate’s 30-year mortgage rate is now 5.78%, the highest since 2008. And rising really fast as The Fed tightens the monetary noose.
Speaking of noose tightening, the 2-year US Treasury Note yield is rising awfully fast.
The US Treasury 10Y-2Y curve slope just flattened to 8.819 bps and challenging the 0% grade awfully fast.
The US Dollar is soaring as US inflation soars, consumer purchasing power (green line) collapses along with M2 Money Velocity.
There is little doubt that soaring inflation, gasoline and food prices have hurt Biden’s popularity as well as the Democrats popularity ahead of the upcoming mid-year elections. People for the most part vote with their wallets.
According to estimates by Bloomberg Economics, US households will spend $5,200 more this year than they did last year on the same consumption basket.
That breaks down to $433 extra in expenditures every single month. That is what is called “the inflation tax.” And it hurts.
Call this The Inflation Tax Blues.
The Federal Reserve is going crazy on inflation news!
The Fed is expected to raise their target rate to 2.875% by February 2023. With that expectation, mortgage rates (yellow line) are soaring. And with that, University of Michigan’s Buying Conditions for housing has plunged to 43, the lowest levels since 1982 as the US was trying to recover from high inflation.
The University of Michigan consumer sentiment index just plunged to the LOWEST LEVEL in history on inflation and Fed’s reaction.
Average REAL wage growth has now declined to -2.11% YoY.
Do Washington DC politicians and bureaucrats feel like we do? I doubt it.
Inflation, the bane of the middle class and working families, just rose to 8.6%.
Core inflation, that excludes energy and food, actually declined slightly to 6% from 6.2% in April. But since most families are concerned with gas prices and food, (not to mention home prices growing at 21.17% YoY), core inflation really underestimates the suffering.
Under Biden’s leadership in cooperation with eternal Fed stimulus (until now), inflation started at 1.4% YoY and has increased to 8.6% YoY. The Fed’s balance sheet has increased by 20.27% (more monetary Stimulypto!), Case-Shiller home prices started at 10.44% YoY and has now doubled to 20.55% YoY. Regular gasoline started at $2.57 and is now at $5.42, up 102%. Food is up 61%.
The Fed is expecting two half-point hikes followed by quarter-point increases.
And mortgage rates keep rising as The Fed fights the inflation fire.
Here is a video of Milton Friedman speaking on inflation.
On the hotter than expected inflation news, the US Treasury 10Y-2Y curve flattened to 12 bps.
Pennies from Heaven. That is what the bottom 50% received from The Federal Reserve’s massive doses of monetary stimulus (or stimulypto).
There was one big dose of monetary stimulus in late 2008 surrounding the financial crisis and housing bubble burst, another doses (aka, QE 2 and QE3) then the biggest dose of all with the outbreak of Covid in early 2020.
President Biden should have mentioned on Jimmy Dimmel last night that The Federal Reserve has helped the bottom 50% with its endless monetary stimulus.
But if you were fortunate enough to own a home (the top 1% are likely homeowners), then you benefited from The Fed’s monetary stimulypto.
And I noticed that Biden didn’t mention plunging REAL average weekly earnings YoY.
The Federal Reserve’s monetary “policies” have benefited the top 1% and homeowners relative to the bottom 50% (who often rent and got clobbered with 20% growth in rents).
Great job, Fed! Making housing more unaffordable for rents (combine rising rents and declining REAL wages and we have a real affordability problem).
Home affordability for first time homebuyers?
And what is with Biden’s ear lobes? As inflation is rising, his ear lobes are shrinking.
The inflation numbers are out tomorrow. I noticed that Biden and Jimmy Dimmel only discussed gun control, not the sad state of the economy under Biden.
As I line up my move from Fairfax VA to Columbus OH, I am getting a variety of quotes from moving companies. And wow! The cost of moving using a national moving company for a 4 bedroom house is $15,000 to $20,500. That includes International, North American and Bekins.
One of the reasons for the high cost of moving is the massive increase in diesel fuel used for trucking. Diesel fuel under Biden has risen 117%. And since it was revealed that natural gas often is used for electric charging stations, and NATGAS is up 281% under Biden (but there aren’t many electric moving trucks yet).
The other problem facing moving companies is labor scarcity. Despite our open borders with Mexico and millions flowing across the border, moving companies STILL can’t find crews. Both Mayflower and United refused to give me a quote for moves under $1,000.
And for any of you who say “Do it yourself!”, I am physically disabled and can’t do it.
I wonder if it would be less expensive if we used horse-drawn moving vans?
Confounded Interest - Anthony B. Sanders 
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